Congress passes 40% CAFE increase

The auto industry will have to bend over backwards to meet the engineering challenges in the corporate average fuel economy (CAFE) compromise Congress passed in December as part of an energy bill.

That is the bad news.

The good news is that by swallowing the reality of a 35-mpg fleet average by 2020, it may have insulated itself politically against additional carbon-dioxide emissions limits that some states, particularly California, want to impose. Those restrictions might break the industry’s back.

The CAFE provision in the energy bill, while not welcome, at least provides certainty. Greg Martin, General Motors’ spokesman in Washington, D.C., explained, “We need that level of certainty to start to match up our product plans to get to these tough standards.”

Not much of a silver lining, true. But the bill does provide Detroit some concessions. Separate CAFE standards for light trucks and passenger cars are maintained, as are—albeit temporarily—CAFE “credits” automakers receive for producing flex-fuel vehicles. Many in Congress wanted to eliminate the credits immediately.

To help the industry meet the new fuel-efficiency standard, the compromise includes a number of new manufacturing and engineering grant and loan guarantee programs: a domestic manufacturing conversion grant program, loan guarantees for fuel-efficient automobile parts manufacturers, an advanced-battery loan guarantee program, and an incentive for producing advanced-technology vehicles.

The thing to remember here is that Congress is simply creating these programs and establishing a ceiling on their funding. There is no guarantee these programs will actually be funded.

So, consider those new “aid” programs as window dressing. They look even less impressive because Congress ditched the two consumer tax credits for plug-in hybrids, which were part of the energy bill until the last moment. One would have started at $3000 for purchase of a plug-in; the second was a 20% investment tax credit, capped at $2500, for the cost of purchasing and installing a plug-in traction battery module used to convert a standard hybrid vehicle to a plug-in type. When the Senate kicked out the oil-industry tax increases, the revenue to pay for those auto incentives went out the window.

The auto manufacturers tried to get language in the compromise prohibiting the U.S. EPA from issuing restrictions on carbon-dioxide emissions from auto tailpipes. A Supreme Court decision in 2007 (Massachusetts v. EPA) has been read by California and some environmentalists to say that the EPA (and the states) can limit tailpipe emissions even if that action complicates the industry’s ability to reach the new 35-mpg CAFE standard.

Detroit did not get language prohibiting EPA unilateral action. But at least some environmentalists imply that they now view EPA action as overkill. “Fuel economy is one of the things that has to happen to cut GHG emissions,” said John DeCicco, Senior Fellow at Environmental Defense, which is a leading environmental advocate for greenhouse-gas (GHG) reductions. “This step now required of the auto industry is greater than what is required of any other industry. It makes the climate-change process easier by removing one important aspect. Now, how do we get other parts of economy under control now that we have cars under control?”

Not all environmental groups feel that way. Ann Mesnikoff, Washington representative for the Sierra Club, said that if California GHG restrictions on tailpipes force the auto companies to get to 35 mpg sooner than 2020, that is fine with her. “The 35 mpg by 2020 [standard] is a floor, not a ceiling,” she said. However, the Bush EPA is unlikely to give California the green light. And given the CAFE compromise, Environmental Defense and some others, if not the Sierra Club, probably will not complain too loudly.

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